Leading Independent Investment Research, Morningstar, Inc.

Morningstar

Leading Independent Investment Research

Morningstar, Inc.

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Equity Bottom-Up

We re-initiate coverage on Singapore Technologies Engineering, or STE, with narrow moat and stable moat trend ratings and a fair value estimate of SGD 3.30. We believe STE’s moat is underpinned by the intangible assets it derives from being Singapore’s main defense contractor, while some of its command and control, satellite telecommunication and surveillance products also enjoy switching costs. Its geographically diversified aircraft maintenance, repair, and overhaul service facilities, along with a broad range of services, should enable the company to navigate increased competition stemming from the backwards integration of original equipment manufacturers, mainly Boeing.Although we have raised our fair value estimate on STE to SGD 3.30 per share from SGD 3.00, this remains below its current market value. STE’s share price is supported by its relatively attractive dividend yield of 4.0%, which has helped mask the company’s lackluster earnings growth over the past 10 years. We also think it obscures continued near-term challenges. Our base-case scenario factors in a gradual recovery in STE’s profit margins, driven by rising contributions from panel maker Elbe Flugzeugwerke GmBH, or EFW; improved scale in its Guangzhou facility; steady growth in its electronics segment; and a gradual recovery in its land systems and marine divisions from low bases. However, we think STE’s current share price reflects a stronger five-year revenue and profit CAGR of more than 11%, which we think would be a challenging achievement, given the MRO industry headwinds.On the bright side, we see little risk to STE’s annual DPS of SGD 0.15. We think the worst of the declines in segment cash flow contributions are over, while the company has been adept at managing its working capital to keep dividends stable. We estimate repayment of a SGD 721 million bond in 2019 should be comfortably managed.Analyst: Lorraine Tan, CFA

We re-initiate coverage on Singapore Technologies Engineering, or STE, with narrow moat and stable moat trend ratings and a fair value estimate of SGD 3.30. We believe STE’s moat is underpinned by the intangible assets it derives from being Singapore’s main defense contractor, while some of its command and control, satellite telecommunication and surveillance products also enjoy switching costs. Its geographically diversified aircraft maintenance, repair, and overhaul service facilities, along with a broad range of services, should enable the company to navigate increased competition stemming from the backwards integration of original equipment manufacturers, mainly Boeing.Although we have raised our fair value estimate on STE to SGD 3.30 per share from SGD 3.00, this remains below its current market value. STE’s share price is supported by its relatively attractive dividend yield of 4.0%, which has helped mask the company’s lackluster earnings growth over the past 10 years. We also think it obscures continued near-term challenges. Our base-case scenario factors in a gradual recovery in STE’s profit margins, driven by rising contributions from panel maker Elbe Flugzeugwerke GmBH, or EFW; improved scale in its Guangzhou facility; steady growth in its electronics segment; and a gradual recovery in its land systems and marine divisions from low bases. However, we think STE’s current share price reflects a stronger five-year revenue and profit CAGR of more than 11%, which we think would be a challenging achievement, given the MRO industry headwinds.On the bright side, we see little risk to STE’s annual DPS of SGD 0.15. We think the worst of the declines in segment cash flow contributions are over, while the company has been adept at managing its working capital to keep dividends stable. We estimate repayment of a SGD 721 million bond in 2019 should be comfortably managed.Analyst: Lorraine Tan, CFA

We Re-Initiate Coverage on ST Engineering, Keeping Our Narrow Moat Rating